National Minimum Wage will pose Risk for Labour Market

The proposed National Minimum Wage (NMW), due to come into force on 1 May 2018, is a quick fix to a systemic problem that will artificially increase salaries for those who already have a job, rather than create more jobs.

Deputy President Cyril Ramaphosa, who enjoys the political backing of trade union federation and Tripartite Alliance partner, COSATU, has championed the cause of the NMW. COSATU is useful for shoring up support for Mr Ramaphosa ahead of the ANC’s elective congress in December, so the NMW is widely seen as a sop to the unions, and a political tool in the ANC’s internal succession battle.

In February 2017, an advisory panel set up by Mr Ramaphosa to investigate wage inequality submitted its recommendations for the imposition of a NMW of R20 per hour or R3,500 per month. Although many have celebrated the impending NMW as a blow against poverty, it will only worsen the fate of the unemployed.

South Africa’s unemployment crisis is well documented. According to Stats SA, almost 9 million people (26.5 percent of the workforce) are jobless and 37.1% of youth (aged 15-34) are without work. Many of these young people will never experience formal employment, and the longer they remain unemployed, the less likely they are to get a job.

A number of likely side effects from the NMW will hit the poor hard.

Bloated wage bills will be passed on to consumers in the form of higher prices and will reduce the real value of higher wages in the market. South Africa’s recent credit rating downgrade and currency weakness already means the cost of basic goods will go up in the medium term. Consumers cannot afford more price increases, even marginal ones.

The NMW will drive up labour costs and discourage firms from hiring additional personnel – resulting in fewer staff being paid higher wages. Many people, who would otherwise have been eligible for jobs, will be consigned to unemployment.

Small businesses will be squeezed, as they will not be able to afford the costs of compliance. This will benefit dominant companies who will exploit their market power at the expense of emerging SMEs.

The introduction of a minimum wage will push labour-intensive industries toward greater automation of their systems, further exacerbating unemployment. Labour absorbing sectors, such as mining and agriculture (already suffering from low commodity prices and increased labour regulation), will find automation irresistible. Low-skilled workers will be negatively affected by this.

Advocates of the NMW argue that higher wages will stimulate aggregate demand in the economy and that the effect on unemployment will be “statistically insignificant.” However, these proponents ignore the importance of supply-side factors for economic growth, such as labour productivity.

South Africa’s economic history shows that, in the 1970s, when wages increased during a period of prolonged economic stagnation, upward pressure was exerted on labour costs per unit of output produced which made the country uncompetitive as an exporter.

South Africa requires higher utilisation of its existing productive capacity before it can guarantee wage minimums. For this to happen, the quality of the labour force must improve as productivity growth has not kept pace with ever increasing wage demands. Other countries that have a minimum wage, enjoy much higher levels of productivity than South Africa.

Because of a historically dysfunctional education system, many workers are ill-equipped to operate in an increasingly services-based economy. To compete globally, South African workers need to keep pace with changes in skills which will require access to advanced vocational training. Employers, though, may cut back on expensive skills development programmes if their labour costs are inflated because of the NMW.

Having a job, even a low paying job, not only provides people with a source of income, but also enables them to benefit from lateral skills transfer and gives them self-worth. A low-paying job is often a temporary first step on the career ladder.

Karl Marx wrote that workers are alienated from the means of production, but a jobless person is arguably more alienated and prone to anti-social behaviour if they cannot see a future for themselves as a productive member of society.

Fundamentally, the NMW will infringe on the right of workers to freely contract their labour by making it illegal for them to work for less than the government-mandated wage, even if they consented to do so. This constitutes an unjustified, state imposed limitation on an individual’s right to work.

The NMW is intended to address South Africa’s high level of wage inequality, but the real effect will be to privilege insiders and exclude outsiders. Inequality is not the enemy. Unemployment and poverty are.

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